Southwest Sees $100 Million in Revenue From Fee Changes

Dec. 14 (Bloomberg) -- Southwest Airlines Co., the discount
carrier with the “Bags Fly Free” slogan, forecast $100 million
in annual revenue from fee changes that will include the first
charges for no-shows on flights and premium boarding positions.

The new fees and increases to existing charges will start
in the first quarter, Chief Commercial Officer Bob Jordan said
today at an investor meeting in New York. Dallas-based Southwest
expects to boost revenue by $1.1 billion in 2013 as it works to
cover rising labor and jet-fuel costs amid growing competition.

Southwest’s fee moves mark a departure from its reputation
as a no-frills carrier that bucked the rest of the industry by
letting passengers check two bags for free and change flights
without penalty. The no-show fee would be levied on passengers
who don’t cancel tickets before a flight.

“This one is pretty industry standard,” Chief Executive
Officer Gary Kelly said. “Customers understand we could all
benefit from the opportunity to resell a seat. Once the airplane
takes off and it’s empty, we can’t ever resell it.”

Kelly didn’t rule out that other fees may be added in the
future, saying “we don’t have a first bag fee idea for 2013 or
a change fee.”

With the changes, Southwest expects “a doubling or more of
earnings year over year” in 2013, Kelly said, without giving
details. The forecast is based on unchanged economic conditions
and fuel prices. Southwest’s net income through 2012’s first
nine months was $343 million on $12.9 billion in sales.

Two Bags

Passengers can still check two pieces of luggage for free,
although charges for a third checked bag will increase an
unspecified amount, said Jordan, who is also president of the
AirTran unit. The overweight-bag fee will double to $100.

Southwest already has a charge to reserve an early boarding
slot, and will increase that fee to $12.50 from $10. Starting
next year, passengers can get an early-boarding slot by paying a
fee at the gate.

At AirTran, the first checked bag fee will rise to $25 from
$20 and a second bag to $35 from $25, Jordan said.

“These are real, valuable and noteworthy changes,
considering Southwest’s historical aversion to an unbundled
product,” Hunter Keay, a Wolfe Trahan & Co. analyst, said in a
note today. Keay, based in New York, maintained an underperform
rating on Southwest.

Southwest rose less than 1 percent to $10.19 at the close
of New York trading. The shares have climbed 19 percent this
year, compared with a 27 percent increase on the Bloomberg U.S.
Airlines Index.

Managing ‘Aggressively’

The elimination of 300 jobs by not filing open positions
and anticipated retirements is part of $100 million in savings
planned for 2013, Kelly said. The carrier had 46,048 employees
at the end of September and has never laid off workers.

Kelly declared rising expenses Southwest’s enemy a year
ago, after larger carriers such as Delta Air Lines Inc.
restructured in bankruptcy. The changes by competitors cut
Southwest’s cost advantage in half and pushed its employee pay
rates to the highest in the industry.

“We are managing as aggressively as we dare to evolve the
Southwest Airlines customer experience and operations to be
successful in this environment,” Kelly said today.

The airline expects to meet its goal of a 15 percent return
on invested capital in 2013, he said.

Southwest, the fourth-largest U.S. carrier, will change the
way it schedules planes and people and the way it prepares jets
between flights, raising $100 million in revenue, Jordan said.
Another $100 million in 2013 will come from a change in its
revenue management system.

Southwest bought AirTran Holdings Inc. in 2011 to expand
its fleet and add service in Atlanta, the biggest market it
didn’t yet serve. The two airlines will be able to share each
other’s booking codes on flights starting in early 2013, with
full integration not coming until the end of 2014.

The airline expects its loyalty program to add another $80
million in 2013, with $400 million in 2013 synergies from
connecting Southwest and AirTran networks. New, more fuel-efficient aircraft and added seats will contribute “hundreds of
millions” in incremental revenue next year, Southwest said.